More Higher Ed Funding on Congressional Agenda

Published January 1, 2007

Higher education programs are expected to take center stage in the 110th Congress. The Democrats campaigned aggressively in 2006 on a platform of increasing federal subsidies for higher education.

The Democrats’ proposals are said to be geared toward helping American families afford rising higher education costs. But analysts question whether additional federal subsidies will actually make college more affordable.

According to news reports, incoming House Speaker Nancy Pelosi (D-CA) may be planning to slash interest rates on student loans from 6.8 percent to 3.4 percent, at a cost of $2.6 billion. Rep. George Miller (D-CA), the new chairman of the House Education and Workforce Committee, introduced legislation in the last Congress to reduce parents’ loan interest rates from 8.5 to 4.75 percent, costing an estimated $5-12 billion annually.

Record Spending Already

The expected proposals for new higher education funding come as the federal government is already spending at historically high levels on postsecondary education. According to The College Board, federal spending on higher education totaled $90 billion in 2005–a 103 percent increase over the past decade.

The funds are delivered in several ways, including $63 billion in loans, $18 billion in grants, $8 billion in tax credits and deductions, and $1 billion in work-study assistance.

Spiraling Costs

Federal spending on higher education has increased significantly under the Bush administration.

For example, annual Department of Education spending on federal Pell Grants grew from $8.7 billion in 2001 to $13 billion in 2006–nearly 50 percent growth over five years.

Even so, the growth in federal support for higher education has not kept pace with rising tuition costs. According to The College Board, tuition costs at four-year private and public colleges increased by 5.9 percent and 7.1 percent, respectively, during the 2005-06 school year.

Analysts question whether additional federal spending on higher education will make education more affordable. Neal McClusky, an education analyst with the Cato Institute, pointed out the likelihood of unintended consequences from further subsidies.

“For students able to get lower-interest loans and bigger Pell grants, the Democrats’ plan will make college marginally more affordable,” McCluskey explained. “In the long run, though, making aid cheaper and more plentiful will just perpetuate the insane tuition inflation that’s plagued higher education for decades.”

More Extravagance

McCluskey said federal subsidies create an economic relationship that necessarily inflates tuition prices dramatically.

“By giving students more money–furnished by taxpayers rather than by the students themselves–students and parents will demand even nicer dorms, more posh recreation facilities, more gourmet food, and more of all the other extravagances that have become staples at colleges and universities over the last couple of decades,” McCluskey explained. “In the face of that demand, colleges will raise their prices so that they can capture the new aid and offer the luxuries that they must have to compete.”

Lexington Institute Executive Vice President Don Soifer acknowledged that increasing subsidies for higher education may appeal to voters but isn’t necessarily good public policy.

“The notion of lowering interest rates for student loans sounds tempting politically,” Soifer explained. “But how it works and how we pay for it are crucial details. Passing higher subsidies on to taxpayers makes it a lot less attractive.”

Other Solutions

Soifer agreed that increasing subsidies may contribute to escalating tuition prices.

“The costs of higher education have been growing at a rate well above inflation, especially at four-year public institutions, Soifer said. “Taxpayer subsidies appear to be part of the problem.”

Rather than simply increasing federal subsidies, Soifer and McCluskey suggested alternatives to help curb runaway higher education costs, including greater financial accountability.

“Injecting some transparency for how that public money gets spent, especially at public colleges and universities, might be one way to apply downward pressure to rising tuition,” Soifer said.

McCluskey suggested reducing federal government involvement in education and refocusing remaining aid programs to assist the truly disadvantaged.

“Only then will college be made affordable for the truly poor without constantly driving college prices to ever-more stratospheric heights,” McCluskey said, “and, by the way, sticking taxpayers with bigger and bigger higher education bills.”

Dan Lips ([email protected]) is an education analyst at The Heritage Foundation in Washington, DC.

For more information …

“Trends in College Pricing,” The College Board, Trends in Higher Education Series 2005,